Statement by Mr. Sauli Niinistö, Minister of Finance, Finland
On behalf of the Nordic and Baltic countries
at the International Monetary and Financial Committee Meeting
April 29, 2001

The International Monetary and Financial Committee member for the constituency consisting of Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, Sweden.

Introductory remarks

In my statement, which I am presenting on behalf of the Nordic and Baltic countries, I will
focus first on the prospects for the world economy, secondly on matters related to the
international financial architecture and finally on the joint effort of fighting poverty and
strengthening growth in the poorest member countries.

First of all, let me welcome the Federal Republic of Yugoslavia as a member country of the
International Monetary Fund.

Global economic developments and prospects

The atmosphere here is very different from what it was when we met in Prague. A notable
slowdown in the United States and unsolved problems in Japan contribute to the uncertainties and
downside risks in the international economy. The risks, moreover, are not evenly spread across
the different countries. It is the countries in Asia and the Western hemisphere which have the
strongest economic linkages—direct or indirect—with the US and Japan that face the
greatest risks. The EU is expected to be less affected, but is, of course, influenced by global
developments.

The last few years have seen a substantial increase in global imbalances. An orderly
adjustment, supported by policy action, is necessary in order to avoid unduly large and abrupt
corrective movements, induced by overreactions on the financial markets.

The slowdown in the international economy could at some stage reveal
vulnerabilities in financial systems. Against this background, it is important to intensify efforts for
strengthening the international financial system as well as individual national financial systems.

USA

The economic slowdown in the US has been pronounced. There are major grounds for
concern. The private sector is dis-saving and private indebtedness has increased considerably.
The reaction of consumers to income generated through tax reductions that are planned by the
new administration and to lower interest rates put in place by the central bank is thus uncertain.
The uncertainty will be exacerbated if households do not see a rebound in financial wealth and
employment prospects are seen to worsen.

Furthermore, expansionary policies will not correct the long-standing imbalances in the US
economy. The private sector deficit and concomitant huge current account deficit should be
tackled with structural adjustment. Therefore, while the adjustment is necessary and welcome, the
policy challenge is to avoid abruptness.

Japan

The economic situation in Japan is becoming increasingly worrisome. Efforts to accelerate
growth have again been offset by a lack of private sector confidence. Fiscal policy has exhausted
its possibilities to stimulate growth. In fact, the Japanese government faces the necessity of
pursuing fiscal consolidation in the near future, particularly in view of the increased costs
associated with an aging population. The recent easing of monetary conditions through the
reintroduction of the zero rate policy, while helpful, will not by itself restore confidence.
Structural policies are more important than counter-cyclical policies in inducing a recovery. One
urgent task is to continue the restructuring of the financial sector, to which the Japanese
government has recently committed itself. The challenge is to maintain and build public
confidence while implementing the necessary measures. Medium-term structural policies and a
game plan for solving the problems would be an effective way to build confidence in the future of
the Japanese economy.

European Union

The European Union has achieved four years of robust growth and is now concentrating on
alleviating the structural problems. Competition is intensifying in the more open product and
financial markets. Labor markets too are becoming more flexible in many countries. Many sources
of rigidity and inefficiency nevertheless remain. More flexibility is needed if these countries are to
benefit fully from enlargement.

Moreover, many of the possibilities connected with new technologies are largely untapped.
The sustained productivity effects from IT investments have yet to be realized in full. Therefore,
further efforts are needed in this area.

Prospective new European Union member countries

The economic performance in most countries seeking accession to the EU is encouraging.
Their main long-term task is to maintain high but sustainable growth rates over the medium term
to ensure real convergence toward EU income levels. It is likely that catch-up in income levels
will result in inflation rates above the EU average, and that current accounts will remain in deficit
due to high levels of investment. Against this background, the challenge for policy makers is to
both facilitate the movement of resources to high-value-added production sectors and to keep the
overall macroeconomic situation stable. Despite large public investment needs, most countries are
not in a position that allows for an increase in fiscal deficits.

The progress in structural reforms is uneven, however, and wide differences remain.
Nevertheless, the most advanced accession countries now appear to have functioning market
economies that could withstand the competitive pressures of the EU environment. Some of these
countries, like many in the EU, still need to reform their pension systems and labor markets to
maintain the necessary flexibility and to increase their laborforce participation rates.

Emerging Markets

The economic outlook in Latin America and Asia is considerably weaker, primarily due to the
downturns in the US and Japan. In particular, the high degree of export orientation of the Asian
ICT-sector appears to make some countries there especially vulnerable to the US slowdown and
the downturn in the ICT-sector. In Asia the reforms of the financial and corporate sectors are
essential to further strengthen economic performance and the functioning of the markets,
including a reduction in the huge subsidies to shipbuilding.

Both Argentina and Turkey are currently in the midst of a difficult financial situation. The
IMF's role is clearly to provide economic policy guidance and financial support, while the national
authorities are responsible for the design and implementation of both political and economic
programs. Financial crises are, by nature, very costly; hence rapid, decisive and credible policy
actions are necessary. I welcome the recent announcement of a new economic program for
Turkey, and, on behalf of my constituency, I would like to express our continued support for
Turkey. We appreciate the efforts made by the staff and the Management to bring the
arrangement to conclusion. Now it is for the Turkish authorities to forcefully implement the
agreed measures. In Argentina, a promising program focusing on improving competitiveness and
strengthening the budget has been approved by the congress. Our constituency also welcomes this
progress on improving the economic situation.

Russia

Several factors supporting Russia's growth may prove temporary, or have already been partly
reversed. This clearly constitutes a major risk for the Russian economy in the near future.
Therefore, sustained growth will require the support of long-term measures which will improve
the functioning of the economy. Indeed, the current favorable economic situation presents a
unique opportunity, for example, for the Russian authorities to reform the very weak and opaque
financial sector, improve corporate governance and enhance the budgetary system. The authorities
would find that such measures strengthen confidence and attract both foreign and domestic
investments. The Nordic-Baltic countries urge the Russian government to continue to engage
with the IMF in further development and implementation of their structural reform program, and
to monitor its progress.

The IMF in the process of change

Involving the Private Sector in Crisis Prevention and Resolution

There is wide agreement in the international community that the private sector should be
more systematically and directly involved in the prevention and resolution of financial crises. The
principles and guidelines that the IMFC endorsed last September comprise useful groundwork.
However, further work is needed. First, efforts must be made to ensure that the agreed PSI
framework is implemented in a transparent and consistent manner and to ensure that PSI becomes
a standard element of crisis resolution. Second, the current framework also needs to be
strengthened and made more predictable to market participants.

We feel that there is a need for the Fund to reinforce the implementation of the current PSI
framework, particularly as regards monitoring and assessment. Moreover, the application of
access policies should be more transparent. The IMF should be required to describe clearly how it
has applied its framework for private sector involvement in each case and especially in cases
involving high access to Fund resources.

High access lending above regular access limits should be possible but only in exceptional
cases. To counter contagion with systemic effects, use should be made of the SRF, rather than
the regular facilities. There might be a need to consider introducing a backstop, to ensure against
excessive use of the SRF. For the tighter access policy to work in practice, it has to be
accompanied by a strong presumption about the extent and form of private sector involvement. In
cases with exceptional financing, there should be a strong presumption for concerted PSI.

In certain extreme cases, it may be necessary for a country to declare a postponement of
payments to creditors. A set of principles could be established, through a consultative and
collaborative process among the involved counterparts, with a view to defining clear and
transparent standstill guidelines that would also be incorporated into the Fund's lending into
arrears policy.

Implementing Standards and Codes

Implementing standards and codes in areas relevant to the effective functioning of countries'
economic and financial systems is today accepted as central to strengthening the architecture of
the international financial system. The Nordic and Baltic countries welcome the recent efforts to
speed up the process. The Reports on the Observance of Standards and Codes (ROSCs) have
proved to be a workable and consistent approach to the assessment of standards. For the ROSC
to live up to its full potential, the process should strive to present a comprehensive and honest
accounting of the financial sector policies in a particular country.

Experience tells us that ROSC assessments can provide useful information for surveillance
discussions. The assessment of both legislation and practical implementation of standards can also
supply country authorities with valuable information. We encourage countries to participate in the
ROSC process. Indeed, those countries from our own constituency which have participated in
ROSCs have found that the time and effort spent on this exercises have been well
worthwhile.

Streamlining Conditionality and Strengthening Ownership

Conditionality is one of the most fundamental issues underpinning financial relations between
the Fund and its members. Adjustment and finance are the two key components of the Fund's
support package to a member. However, in recent years the link between adjustment and finance
has become blurred.

We agree that there is a need for streamlining structural conditionality and strengthening
ownership. However, we also see a strong interdependence between structural problems and
macroeconomic and financial instability. Consequently, we should not be concentrating solely on
cutting the number of structural conditions in the programs, but also on bringing about a more
focused and effective conditionality.

The appropriate test to ascertain whether a particular economic policy measure should be
included in the adjustment program is the importance and relevance of this measure for achieving
the program's overall macroeconomic objectives. Conditionality must be country-specific.
Program details should also depend on the type of the program.

Streamlining is also about establishing a better division of labor between international
financial institutions. Fund conditionality should focus on the Fund's core
areas—macroeconomic policies and financial issues.

In view of the central role that financial markets have played in recent crises, it should be
considered whether standards and codes could play a useful role in applying structural
conditionality in a more systematic and consistent way. As an example, if a country has a weak
banking sector and this impedes the achievement of broad stabilization objectives, setting a
program requirement of carrying out specific reforms in order to achieve compliance with certain
core Basel principles, such as those on capital adequacy or risk management, seems justified.
However, it must be kept in mind that standards and codes entail a substantial qualitative element.
The test of whether to make compliance with a standard or code a performance criterion must be
whether such a condition is vital for macroeconomic and financial stability. Mandating full
compliance with core principles would, therefore, go beyond the purpose of conditionality.

Strengthening the IMF's focus on financial markets and crisis prevention

Financial sector weakness has been one of the underlying factors for large Fund programs in
recent years. It is therefore increasingly important for the Fund to focus on this sector. The
Financial Sector Assessment Program process provides a coherent and comprehensive framework
for identifying financial system vulnerabilities while, at the same time, helping to strengthen the
analysis of linkages between the soundness of financial markets and macroeconomic development.
We believe that the analysis contained in the FSAPs is a welcome addition to the IMF's
surveillance toolkit.

The Nordic-Baltic countries acknowledge the value of wide country participation in the FSAP
process. Nevertheless, because of resource constraints, we lean toward having FSAPs conducted
selectively. Priority should be given to systemically important countries and countries that are
planning or implementing significant financial sector reforms.

Offshore financial centers present a potential risk to the international financial system.
These risks arise mainly from circumstances where supervision and statistics are weak and
regulation is lacking. Recently, more than 20 offshore financial centers have agreed to participate
in a survey conducted by the IMF. We find this very encouraging.

Improving financial supervision of OFCs is well suited to the Fund's core mission of
preventing crises. The IMF's assessment of OFCs should be limited to issues and standards that
are related to financial sector supervision and relevant to financial vulnerability. We believe that
the adopted approach is appropriate and that much of the emphasis, for now, should be on
self-assessment and technical assistance. From there, the most logical way to go forward is
through already existing procedures under the FSAP.

We welcome the recent work on public debt management in the Fund and the World Bank
and recognize the resulting Guidelines (for Public Debts Management) as an appropriate
instrument to assist countries in their efforts to improve debt management practices and reduce
financial vulnerability. These voluntary guidelines should be useful in the Fund as a framework for
technical assistance, and they could also play a role in surveillance.

We recognize the importance of enhancing the Fund's practical and theoretical understanding
of financial market operations and their effects on macroeconomic developments. In this vein, we
welcome the Fund's efforts to strengthen its competence in this field and we look forward to
"value added" from the new organizational structure.

Financial Abuse/Money Laundering

Financial system abuse is a major and growing problem. Because of its evasive nature and
large potential cross-border effects, joint efforts in various fora are needed to push forward
international collaboration, harmonization of legislation, best-practice-rules and transparency. We
believe that the Fund should continue to support international efforts to counter financial abuse
and also increase its own involvement within the limits of its mandate. The Fund should not
assume new roles, for instance, in connection with law enforcement issues.

In general, the Fund can best contribute through its efforts to promote sound financial
systems and good governance. Instead of building a huge apparatus of its own, the Fund should
emphasize cooperation with already existing expert bodies. This would mean looking for ways to
incorporate relevant recommendations, such as those of the Financial Action Task Force (FATF)
on money laundering, into its assessments of standards and codes. Accordingly, it is also essential
that Article IV consultations, where appropriate, include a section dedicated to the actions
implemented to fight against money laundering, including the assessment of the implementation of
those of the FATF Forty Recommendations relevant to macroeconomic or financial stability.

Fighting Poverty and Strengthening Growth

The Nordic-Baltic Countries welcome the progress made under the HIPC initiative and
remain fully committed to this joint endeavor. We would underline that debt reduction should be
seen in the context of globalization, as a way of enabling developing countries to participate in the
world economy, and as an essential element in a wider strategy for poverty reduction. Debt
reduction must be accompanied by other policies, and the liberalizing of market access for all
categories of products from the poor countries is of the utmost importance. This calls for both
bilateral and multilateral action. Debtor countries must do their share by carrying out the
necessary reforms for paving the way to economic growth and export revenue. Also creditors and
donors must come forward with the necessary financing, both on multilateral and bilateral.

The Fund can best contribute through its macroeconomic framework, by promoting high
quality growth that leaves room for fighting poverty. By coordinating this work with that of the
World Bank, policies can be further focused so as to ensure that the money saved through debt
reduction is used for reducing poverty.

Poverty and social impact analyses of the policy measures underpinning poverty reduction
strategies are critical to ensuring that poverty is reduced in the countries benefiting from the HIPC

Initiative. Much work needs to be done to improve countries' public expenditure management
systems and their capacity to track poverty-related spending. It is also important to improve tax
systems in order to strengthen the public sector budget position.

It is evident that it will be relatively more difficult for some of the remaining countries to
qualify for debt relief. We should show reasonable flexibility in these cases, while at the same time
adhering to the basic principles of the HIPC-initiative.

When it comes to applying common principles to countries reaching the Completion Point, it
is important to emphasize adherence to program targets. We should remind ourselves that a
sustainable exit from the debt trap is the overriding goal of the HIPC initiative. Therefore, we
need to emphasize adjustment. So far, we seem to have measured success in terms of quantity,
that is by the number of countries qualifying for debt reduction. Now, we need a shift in mindset.
We need to start measuring success more in terms of quality.